However, the documents also raised some new concerns for observers, including questions about the true strength of AIG's property-casualty performance, the carrier's newly announced $850 million asbestos-and-environmental charge, and the launching of a new independent reserve review.

The report shows AIG has restated a wide range of major financial figures going back to 2000. These changes include cutting net income by $3.92 billion for the past five-year period to correct for improper accounting and to add reserves for A&E claims.

Looking at the numbers year-by-year, AIG's 2004 net income was adjusted down to $9.73 billion–$1.32 billion lower than previously reported. AIG also lowered its net income by $1.27 billion for 2003, while income for 2001 and 2000 were also revised down–by $1.19 billion for 2001 and by $498 million for 2000. The 2002 net income saw a net gain, however, of $347 million.

AIG said its book value–also known as shareholders equity–was revised down to $80.6 billion as of year-end 2004, $2.26 billion lower than previously reported.

Restatements and adjustments have actually resulted in a $3.3 billion book-value decline–higher than AIG's previous estimate of a $2.7 billion drop offered last month.

However, this $3.3 billion book-value loss was offset by a $1 billion book-value gain in correcting AIG accounting for derivatives under the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 133. (AIG had said in May that correcting derivatives and hedging accounting might add up to $2.4 billion to its book value.)

“In terms of positives, everyone now knows what most of the issues are, and that's a good thing for AIG. I think hopefully they can move forward from here,” said A.M. Best Company's managing senior financial analyst, Joyce Sharaf.

Standard & Poor's managing director, Mark Puccia, echoed Ms. Sharaf's sentiment. “One of the most important positives is that AIG finally got the 10-K statement out,” he said.

However, he added, “when you start digging through it, it's a mixed bag of information–there is a lot of information that clarifies AIG's financial performance, but there are also elements that indicate a fair amount of restatement that's gone on.”

Wayne Bopp, who helps manage $34 billion at the Cincinnati-based investment-advisory firm Fifth Third Bancorp, said his “impression is that [former AIG Chairman and CEO] Hank Greenberg spent too much time shining the apple, making it look as good as possible. But you know, he didn't have to do that, because if you take all the earnings restatements and count everything in, you have a 2.7 percent change in book value. That's not earth-shattering–and to think AIG has to go through all this for that. They didn't have to cheat.”

“On the whole, it's a good thing that AIG got the 10-K out–they passed an important milestone. They have an audited 10-K and earnings results that are not all that much different from what they originally reported,” added Paul Newsome, an analyst at AG Edwards & Sons Inc.

The restatement came just days after New York Attorney General Eliot Spitzer filed a civil lawsuit against AIG, Mr. Greenberg and former CFO Howard Smith, alleging that the carrier's accounting was “manipulated” to deceive shareholders.

AIG also disclosed in its 10-K last week that it had added $850 million to its loss reserves to reflect changes in asbestos-and-environmental liabilities estimates–a disclosure that surprised some analysts. The net asbestos reserves have been increased by $650 million, while net environmental reserves got a $200 million boost for the 2004 fourth quarter.

Additionally, AIG said it will begin an independent actuarial review of loss reserves in its property-casualty operations, with a plan to complete the review before announcing 2005 results.

AIG's financial corrections, contained in its 10-K filing, are the culmination of a 14-week internal review conducted by AIG's auditor, PricewaterhouseCoopers, in conjunction with the law firms of Simpson, Thacher & Bartlett and Paul, Weiss, Rifkind, Wharton & Garrison.

The restated financial numbers, AIG said, are the result of new accounting for reinsurance contracts and other transactions under prior top management that helped understate liabilities for claims and artificially inflate underwriting profitability.

Among the changes, AIG corrected for discounting of reserving made through transactions with offshore reinsurance entities that AIG has a significant stake in, including Barbados-domiciled Union Excess. The insurer's 10-K also reclassified as investment income some of what was previously recorded as underwriting income, which had artificially boosted AIG's underwriting profitability.

AIG Chief Executive Martin Sullivan, who took over the reigns from Mr. Greenberg in March, vowed that AIG has now looked into every possible nook and cranny of its accounting practices and assured that no further restatements would be needed.

“We went though a very extensive review of all our major businesses globally, from bottom up and top down. We believe there should be no further restatement going forward,” Mr. Sullivan told analysts during a conference call. “This provides an in-depth disclosure about financial results of 2004 and our restated results for prior periods. We still have work to do, but the investing public can now focus on AIG's future.”

Mr. Sullivan also addressed questions lingering in the minds of AIG observers. For one, why did it take this long for AIG to file its 10-K?

“The answer is that subsequent to our previous earnings press release, we discovered new information that raised serious issues that prompted us to conduct a thorough internal review,” he said. AIG had determined that there were material weaknesses in the company's controls and that financial statements needed to be restated, he noted. “And as the 10-K notes, AIG has already taken numerous steps to strengthen our controls, but this is an ongoing process and it will take time to complete.”

He added that AIG is “embarking on a new era that will be marked by changes in the way we operate, including greater responsiveness and transparency.”

Mr. Sullivan also acknowledged that recent events surrounding AIG have hurt the insurer's competitive position. Included in the fallout is the loss of the carrier's “triple-A” ratings, which hurt customer relationships in the financial products area while raising AIG's borrowing costs.

“So our primary mission is to stabilize our ratings. We are working closely with ratings agencies to try to accomplish this,” noted Mr. Sullivan.

Another impact for AIG is that regulatory probes and negative publicity have prompted some producers in the domestic life and retirement services area to be cautious in placing business with AIG units, according to Mr. Sullivan.

On the brighter side, AIG's domestic brokerage group, foreign general and foreign life operations haven't seen much impact, and the business overall “continues to perform well,” Mr. Sullivan said.

“We remain committed to achieving an above-average performance,” the AIG chief executive said, but he warned that earnings volatility will occur and that AIG would not be providing guidance.

Overall, AIG's much-delayed filing of its 10-K with the U.S. Securities and Exchange Commission–originally scheduled for March 16 but delayed three times as the company undertook its internal review–was welcomed by analysts, who said some of the uncertainty hanging over AIG has now been lifted. However, some observers also told National Underwriter that the contents of the 10-K were at best a mixed bag, containing good news and bad.

S&P's Mr. Puccia said one negative he found is that AIG's p-c performance for the past several years now looks worse than was originally portrayed. One accounting practice that had masked AIG's true p-c performance was some discounting of reserving through offshore entities, which has now been corrected. Also, AIG's reclassification of some underwriting income as investment income reveals that AIG has been overstating its p-c underwriting profitability.

Analysts also expressed surprise at AIG's $850 million A&E charge and the new reserve review, which they say is likely to lead to further charges down the road.

During the analyst conference call, Mr. Sullivan commented regarding the A&E charge that after sitting down with the actuarial division during the internal review, “we believe this was a much better estimate for A&E.”

With regard to the independent actuarial review, “we believe our reserves are reasonable, but we also believe that by commissioning an independent actuarial review, it will really help our judgment going forward,” Mr. Sullivan said.

However, Mr. Newsome of AG Edwards & Sons cautioned that the reserve review would open the door for a future reserve charge. “Usually when insurers are talking about a review of their reserves, it means that reserves need to go up,” he said.

“To me, what AIG is saying sounds like, 'Oh yeah, these are good reserves, but we will have an independent outsider review the reserves and we will get back to you later in the year,'” added Mr. Bopp from Fifth Third Bancorp. “Well, no consultant has ever looked at reserves and not suggested a change. So, it looks like we will get another hit later this year.”

Looking forward, AIG still faces a number of obstacles. Among the uncertainties that AIG will have to address is settling the civil lawsuit filed by New York authorities and reaching resolutions with various other attorneys general and state insurance departments.

The biggest hurdle, analysts warn, might be to demonstrate to the market that AIG maintains a superior competitive position and is able to produce a superior business operation, S&P's Mr. Puccia suggested. “These are the future milestones analysts will be looking at for AIG to reach,” he said.

Flag: By The Numbers

Key Figures In AIG's 10-K

o $3.92 Billion–total downward revision in net income for 2000-2004 period.

o $2.26 Billion–reduction in book value, representing a 2.7 percent drop to $80.6 billion.

o $850 Million–reserve charge for asbestos ($650 million) and environmental ($200 million) liabilities.

o $???–Future boost in loss reserves to reflect results of newly launched independent review.

Quotebox, with Sullivan Mug:

“We still have work to do, but the investing public can now focus on AIG's future….We are embarking on a new era that will be marked by changes in the way we operate, including greater responsiveness and transparency.”

AIG CEO Martin Sullivan