Research Design

Research Design

Through investigations conducted by the Securities Exchange Commission
and other investigation bodies, American International Group (AIG) were
questioned regarding financial legalities and business legalities in
terms of transactions with other companies. One particular probe
against AIG is issue regarding financial fraud wherein the company is
said to be involved in reinsurance activities. AIG used the following
data which is assumed to have illegalities, found by different research
bodies such as the Morgan Stanley Equity Research, to dismiss two senior
executives.

$250 million reserves that were made to be less visible for liabilities

AIG reinsurance transactions with other companies and housing Richmond
Insurance Company without proper transfer of risk.

The consequence of AIG’s decision of firing the two senior executives
gives them the following problems: strengthening the assumptions that
the company intended the fraud, thus they need to eliminate people who
were part of the fraud and who can reveal the truth; and the problem of
who can support or defend the information found against AIG when the two
executives were already fired. Because of the company’s decision, AIG
is now in a serious problem with financial investigation bodies.

The financial data found on AIG is significant because they can serve as
reasons for conducting further investigation on issues filed against
AIG. However, such data has limitations to be able to conclude that AIG
has really committed fraud. This is because the data are still not
enough and further information is still to be investigated.

Reference

Hays, Daniel. Taking The Fifth A ‘Serious Problem’ For AIG, Spitzer
Says.

Retrieved on August 5, 2005, from Online. Web site:

HYPERLINK
"http://www.nationalunderwriter.com/pandc/nuonline/032805/p12taking_the_
fifth.asp"
http://www.nationalunderwriter.com/pandc/nuonline/032805/p12taking_the_f
ifth.asp

Taking The Fifth A ‘Serious Problem’ For AIG, Spitzer Says

By Daniel Hays

New York Attorney General Eliot Spitzer, in a talk to an Irish bar
group, said American International Group has "a serious problem" if its
senior executives refuse to answer regulators’ questions.

"If the Fifth Amendment is being asserted by senior executives who can
speak on behalf of a corporation such as AIG, then that is a serious
problem for AIG," he told the Law Society of Ireland in Dublin.

His comments last week to the 6,000-member national organization, which
regulates the legal profession in Ireland, came as AIG revealed it had
fired two high-ranking executives at the company with involvement in its
reinsurance activities.

The two were dismissed for failing to cooperate with an accounting probe
being carried out by Mr. Spitzer’s 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 AIG’s 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 report—which was due last week to the
SEC—and 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 AIG’s domestic brokerage
group pool and Cologne Reinsurance Company—a subsidiary of General Re,
which is part of Berkshire Hathaway.

According to Morgan Stanley Equity Research, $250 million of that deal
was "unwound" last year—meaning 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 companies—notably 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, Richmond’s treasurer, when asked about contacts from
U.S. authorities, said, "I can’t speak to the press," and referred
questions to AIG.

According to filing figures from National Underwriter Insurance Data
Services, AIG was Richmond’s 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 regulator’s 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.