Taking The Fifth A Serious Problem For AIG, Spitzer Says

The two were dismissed for failing to cooperate with an accounting probe being carried out by Mr. Spitzers office, the Securities and Exchange Commission and federal prosecutors.

Both Howard Smith, chief financial officer, and Christian Milton, vice president for reinsurance, had previously been announced as "on leave." The two were dismissed after invoking their Fifth Amendment rights in the course of a "government investigation," AIG said.

The focus of the inquiry has been on AIGs involvement with finite reinsurance transactions that investigators believe could serve as income-smoothing devices to improve a corporate financial picture.

Chris Winans, an AIG spokesman, confirmed that the two had been dismissed as part of company policy requiring employees to cooperate with government authorities on matters pertaining to the firm.

Due to the ongoing probes into its accounting, AIG delayed the filing of its annual 10-K financial reportwhich was due last week to the SECand its stock has plummeted recently amid speculation a major readjustment could be announced.

The reinsurance arrangements being looked at include a $500 million retroactive reinsurance transaction between AIGs domestic brokerage group pool and Cologne Reinsurance Companya subsidiary of General Re, which is part of Berkshire Hathaway.

According to Morgan Stanley Equity Research, $250 million of that deal was "unwound" last yearmeaning premium and reserves transferred from AIG back to Cologne.

Morgan Stanley said the assumption of premium in that transaction, which looks good on the income statement, was listed with the underwriting section that analysts watch closely, while the reserves that were involved were tucked away as less visible aggregate write-ins for liabilities.

According to the analysts, this "would have had a salutary impact on the perception of the income statement if our understanding is correct"

Other reinsurance deals being looked at reportedly involve AIG transactions with several Barbados companiesnotably Union Excess Reinsurance Company, Ltd., and Richmond Insurance Company, both listing their domicile as Bridgetown.

Richmond, although domiciled in Barbados, is actually housed in the American International Group building on Richmond Road in Pembroke, Bermuda, and the operator answers calls to the firm, "AIG."

Jeremy Parwani, Richmonds treasurer, when asked about contacts from U.S. authorities, said, "I cant speak to the press," and referred questions to AIG.

According to filing figures from National Underwriter Insurance Data Services, AIG was Richmonds only customer in 2003. The firm reports it is owned by AIG and Munich Re, among others. The 2003 data shows that among foreign reinsurers for AIG, Richmond was one of its biggest, and had premiums ceded of $106.3 million and net recoverables of $666.0 million.

In the late 1990s, AIG came under scrutiny by regulators for its use of the Barbados insurer Coral Re. New York and Delaware concluded at the time that there had not been a proper transfer of risk.

Coral Re ceased doing insurance business in 1997. Before that, when a critical regulators report was released, AIG referred inquiries to Mr. Smith, who angrily brushed aside the suggestion that the company had acted improperly.

Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.