NEW YORK (Reuters) ? Insurer American International Group Inc., which is being sued by US regulators over an accounting scandal, said yesterday it had overstated net income for the past five years by $3.9 billion, or ten percent.

Following an internal review, AIG finally released a thrice-delayed regulatory filing in which it also cut its net worth through the end of 2004 by $2.26 billion, or 2.7 percent ? less than an early May warning of a possible $2.7 billion.

AIG, the world's largest insurer by market value, said the $3.9 billion reduction in net income for the five years through 2004 included an $850 million increase in its asbestos and environmental reserves for the fourth quarter of 2004.

"There is both good and bad news," said Michael Chren, senior portfolio manager of National City Investment Management Co., citing the eventual filing of AIG's 10-K annual report and less-than-expected reduction in net worth as positives.

"But the big negative from our perspective is the asbestos reserve review. That will leave a cloud over the shares."

The reserves were adjusted to reflect a new view that potentially more claims could hit the company as AIG increasingly takes into account the losses it has experienced.

The company said it will commission an independent actuarial review of loss reserves of its main property and casualty insurance operations.

The filing with the US Securities and Exchange Commission came a week after New York authorities filed a civil lawsuit against AIG, former chief executive Maurice "Hank" Greenberg, and former chief financial officer Howard Smith.

The lawsuit said Greenberg and Smith, who were ousted after the investigation picked up steam in February, committed fraud and manipulated company books to exaggerate the strength of AIG's core underwriting business and prop up the stock price.

Greenberg's lawyers said they would dispute the charges.

Authorities, including New York Attorney General Eliot Spitzer and New York's Insurance Department, are still investigating the company with a possibility that criminal charges could be laid. AIG is cooperating fully with regulators.

AIG shares fell 69 cents, or 1.22 percent, to $55.71 on the New York Stock Exchange, after a recent run-up. The stock has lost as much as $57 billion of market value in recent months. "People are selling on the good news of the 10-K coming out," said A.G. Edwards Inc. analyst Paul Newsome.

The insurer's press statement and securities filing yesterday followed several releases by the company laying out numerous accounting errors dating back over a decade.

"We are embarking on a new era for AIG that will be marked by changes in the way we operate ? including greater responsiveness and transparency," said AIG president and chief executive officer Martin Sullivan in a statement.

In early May, AIG said a planned restatement of more than four years of financial reports for items like reinsurance and its use of derivatives would cut $2.7 billion, or 3.3 percent, from its net worth.

In its latest filing, which ran to over 400 printed pages, AIG said its management identified material weaknesses in its internal control over financial reporting. It expects to file a 10-Q report for the first quarter of 2005 by the end of June.

AIG also said it is unwinding its relationship with privately held Dublin enterprise Starr International Co. which owns 12 percent of AIG's outstanding stock and serves as a deferred compensation plan for AIG executives.

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(Additional reporting by Joe Giannone, Megan Davies and Belinda Goldsmith)