HARTFORD, CONN.--A Merrill Lynch analyst testifying at thesecurities fraud trial of five insurance executives testified thatafter he looked at American International Group reserves, thatprosecutors say were inflated with a sham transaction, he sent outa positive investors note.

Jay Cohen, who has been a property-casualty insurance analystwith Merrill since 1995, appeared as a government witness to giveevidence concerning the deal that took place between the lastquarter in 2000 and first quarter of 2001.

He was the second analyst to testify in U.S. District Court hereconcerning the finite reinsurance transaction between AIG andGeneral Reinsurance unit Cologne Re Dublin.

On trial for conspiring to boost the AIG financial picture areRonald Ferguson (former Gen Re chief executive officer), ElizabethMonrad (Gen Re's former chief financial officer), ChristopherGarand (a former Gen Re senior vice president), Christian Milton(former AIG vice president for reinsurance) and Robert Graham (GenRe's former senior vice president and counsel).

According to the testimony, in the third quarter of 2000 beforethen AIG Chief Executive Officer Maurice Greenberg approached Mr.Ferguson about the deal, his companies reserves had dropped by $59million.

The transaction that was worked out with Cologne re allowed AIGto book 2000 fourth quarter loss reserves of more than $100 millionand $260 million in premium and lift reserves in the first quarterof 2001 by $63 million.

Mr. Cohen, under questioning by Assistant U.S. Attorney AdamSafwat, said as a result of seeing the AIG financials he hadwritten a note to investors that said in part, "given the renewedpremium growth, we would expect reserves to continue rising..."

In other testimony, he said that Mr. Greenberg and unindictedcoconspirator in the case, who was forced to leave the company in2005, had failed to appear at a Merrill investors conference onFeb. 14, 2005 after news reports that the New York State AttorneyGeneral's Office and Securities Exchange Commission had subpoenaedhis company concerning the deal with Gen Re.

Mr. Cohen said the disclosure of the subpoenas was significantnews to analysts. "One of the qualitative things we look at ismanagement and allegations like that raise questions."

The government entered various articles written at the timereporting that management at AIG and Gen Re may have been involvedin the transaction.

Earlier in the trial Alice Schroeder a former Morgan Stanleyanalyst testified she raised AIG's rating in 2001after the reserveincreases were reported and that she probably would not have if shehad known the company's reserves were actually decreasing.