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Non-traditional insurance products snare AIG and General Re???

Many participants in the capital markets seem to miss the significence of the combined Securities and Exchange Commission and New York State reviews of the non-traditional insurance products, an area that the article below notes was "until recently [an] obscure class of financial transactions that authorities believe some companies have used to manipulate their financial statements." This article seems to confirm some of the persistent rumors that AIG and General Re were very active participants in this area. Further, there may well be some truth to the rumors that have been quietly circulating about mis-deeds. Very clearly the last shoe has not yet dropped on indictments of either companies or individuals, including some very senior executives...

An astute reader might want to keep a keen eye out for more news and articles regarding the role of the off-shore insurers in non-traditional insurance products. The full story is far from completely told yet...

U.S. Probes AIG Deal, Greenberg Role


March 4, 2005; Page A3

Federal prosecutors are part of the investigation into a financial transaction between American International Group Inc. and Berkshire Hathaway Inc.'s General Reinsurance unit, a deal that has drawn scrutiny partly because AIG's chairman and chief executive officer personally initiated it.

It was previously disclosed that the Securities and Exchange Commission and New York state are investigating the deal.

The transaction, according to people familiar with the matter, has emerged as a focal point of regulators' review of nontraditional insurance products, an until recently obscure class of financial transactions that authorities believe some companies have used to manipulate their financial statements. AIG Chairman and CEO Maurice "Hank" Greenberg has personally received at least one subpoena over his role in the transaction, which included calling General Re's then-chief executive, Ronald Ferguson, in late 2000 to set up the deal, these people said. It couldn't be determined if Mr. Ferguson received a similar subpoena.

Attorneys from the Justice Department are working with the SEC and the office of New York state's attorney general, Eliot Spitzer, in the investigation, which was initiated by the SEC and Mr. Spitzer's office, the people familiar with the inquiry said. It is unclear which authority sent the subpoena to Mr. Greenberg.

An AIG spokesman said the New York company and Mr. Greenberg are "cooperating fully with authorities, accommodating their requests for information." Berkshire previously has said it is cooperating with investigations into its nontraditional-insurance products. Mr. Ferguson and Joseph P. Brandon, who succeeded Mr. Ferguson in fall 2001, didn't return calls yesterday.

The authorities want to know if the companies used the transaction in any way to manage their earnings or otherwise make their financial statements appear more robust than deserved, the people said.
Under the two-part deal, AIG booked about $500 million in premium revenue from General Re and then added $500 million of claims reserves to its balance sheet, people said. It paid a fee of at least $5 million to General Re, of Stamford, Conn., to set up the transaction. Few other details are clear.

In AIG's case, the authorities want to know if the company used the deal to either artificially inflate its premium revenue or its claims reserves, the people said. The transaction, put in place over at least two quarters, occurred as the property-casualty insurance industry was struggling with sluggish premium growth amid fierce price competition. The deal was struck shortly after AIG came under criticism from investors for releasing claims reserves in the third quarter of 2000, a move some interpreted as helping the company meet its quarterly earnings expectations; the company's shares fell 6% on the day of its profit announcement.