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AIG: The screw tightens

As the weeks pass since the departure of the patriarchal Maurice "Hank" Greenberg from the company he built into the world's largest insurer, so the size of the task facing incoming chief executive Martin Sullivan becomes clearer, as he seeks to restore AIG's damaged reputation and sinking share price.

Greenberg stepped down as chief executive on Monday 14 March, a day after an all-day board meeting and following demands from Spitzer for further information about a $500mn contract with Berkshire Hathaway's General Re possibly designed to artificially boost reserves.

Sullivan, formerly AIG's co-chief operating officer and a servant of the company for 30 years, was installed as Greenberg's successor.

The embattled insurer has yet to file its 10-K financials with the Securities & Exchange Commission (SEC), postponing the submission by up to a further month beyond the deadline previously extended until 31 March 2005.

Financial restatements

The additional delay is to allow "its new management adequate time to complete their extensive review of AIG's books and records", said the company in a statement. The review, resulting from campaigning New York attorney general Eliot Spitzer and the SEC's investigation into finite reinsurance could lead to further financial restatements to the preliminary 2004 results released by AIG in February, warned the insurer - as well as prior-year financial statements.

AIG has already admitted that the transaction with General Re at the centre of the investigation was "improper".

"In light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance," it said in a statement.

"Therefore, AIG's financial statements will be adjusted to recharacterise such transactions as deposits rather than as consolidated net premiums," it added. The adjustment will reduce reserves for losses and loss expenses by $250mn and increase other liabilities by $245mn.

According to the Wall Street Journal, Christian Milton (AIG's chief reinsurance buyer who stepped down soon after Greenberg, along with the insurer's finance director Howard Smith) figures in at least one General Re e-mail describing the finite deal between the two companies. The e-mail allegedly mentions a conversation in which Milton says Greenberg's motivation for the deal was to bolster AIG reserves.

The insurer said that following its review, which includes the scrutiny of a number of finite style transations, it may be forced to restate its book value by up to $1.7bn once the deals have been correctly accounted for. Indeed, investigators are believed to be examining more than 20 such transactions that may have been designed to artificially smooth AIG's earnings growth and balance sheet.

AIG said its relationships with Barbabos domiciled Union Excess Reinsurance Company and Bermuda-based reinsurer Richmond Insurance Company were under investigation, entities which the company had ceded significant reinsurance to. AIG admitted that it may have to treat the two companies as consolidated entities not non-affiliated reinsurers, causing it to restate transactions in which they were involved.

IBNR Weekly, the well-respected publication of analyst VJ Dowling, compiled figures revealing that Richmond and Union Excess make up $1.2bn of the reinsurance recoverables out of a total of $3.6bn from all offshore reinsurers used by AIG at the end of 2003.

'dumping grounds'

And investor publication Barron's suggested the entities were used as "dumping grounds" for under performing property casualty policies, enabling AIG to write more new business than its true capital position allowed by laying off business on the supposedly independent reinsurance companies.

The paper reported that Union Excess had $44mn capital to support the $666mn it owed AIG at the end of 2003.

It also draws parallels with the relationship between AIG and Coral Re, a Barbados domiciled company that, in 1996, insurance regulators in three states alleged was a shell company controlled by AIG in such a way that dealings between the two should not be accounted as bona fide reinsurance transactions.

AIG denied any connection but stopped transacting with the company in 1997. Coral Re was shut down in 1999. At one stage AIG reportedly had over $1bn in policy claims or recoverables with Coral Re.

In his publication Schiff's Insurance Observer, David Schiff has detailed the way in which AIG allegedly set up Coral Re by enticing a number of investors with a risk-free opportunity.

As previously reported, AIG has been in trouble with regulators in the past over finite-style deals it structured for its clients. The company was forced to pay an $80mn fine, disgorge $46mn fees and allow an independent monitor last year after the SEC investigated its sale of financial instruments to Brightpoint Inc and PNC Financial Services Group Inc.

It was also revealed that AIG's auditor PricewaterhouseCoopers (PwC) had been subpoenaed by the SEC to examine whether the financial services firm played any role in the allegations of accounting impropriety levelled at the insurer. PwC has audited AIG for 30 years, covering the period that the insurer rose from its Far East roots to become the world's most valuable insurance company.

Although there is no suggestion that PwC have committed any wrongdoing, auditors are facing greater scrutiny than ever before into their involvement with corporate scandals. PwC, for instance, was replaced by Deloitte & Touche by Tyco International when the company faced difficulties.

AIG has been a lucrative client for the accountancy firm. According to the research firm Audit Analytics, PwC has earned more than $93mn in audit fees between 2000 and 2003.

Ratings downgrade

To add to the company's woes, ratings agency Standard & Poor's (S&P) confirmed on 31 March that it has lowered AIG's prized credit, debt and financial strength ratings following revelations of the insurance giant's involvement in "inappropriate financial transactions".

S&P said that it has lowered AIG's ratings from AAA to AA+ while fellow rating agency Moody's paved the way for a similar action when it revised its outlook on the company's debt and financial strength ratings from stable to negative.

Moody's said that the shift to a negative rating outlook was prompted by heightened uncertainty regarding the ultimate outcome of the intensifying regulatory investigations into the company.

"The number and scope of inappropriate financial transactions - some characteristic of aggressive financial management - have diminished our assessment of management and its internal controls, corporate governance, and aggressive culture," said S&P credit analyst Grace Osborne. "In addition, the potential breadth of management involvement in these transactions raises broader enterprise risk-management concerns."

In a statement, the rating agency continued: "AIG's business position and practices could be weakened as regulators respond to continuing findings from ongoing internal and external probes. Similarly, with the sharp drop in market capitalisation, Standard & Poor's is concerned that management's attention will be diverted from rebuilding its financial services franchise to dealing with legal and regulatory issues."

Sullivan reassures investors

On 3 April, Sullivan wrote an open letter to shareholders in an attempt to reassure them over AIG's future.

In it, he said the "new management team are taking numerous actions in connection with ongoing regulatory inquiries and internal reviews."

"We are committed to improving transparency and corporate governance, and we want to have an open and constructive dialogue with our regulators. At the same time, it is unfortunate that current circumstances have obscured the reality that AIG's unique global franchise is sound, our financial position is solid, and cash flow remains strong," he added.

The company received a welcome boost on 5 April with comments from Spitzer suggesting that he believes a settlement can be reached with AIG in relation to the investigations without recourse to criminal charges.

The New York attorney general said that AIG's board and new management are "cooperating" with the probe, adding: "Based on these efforts, and based upon our knowledge to date, we believe that a civil resolution with the corporation will ultimately be achievable."

Spitzer's comments resulted in a temporary upswing in the company's share price, which had lost a total of 19.8 percent of its value since AIG CEO Maurice "Hank" Greenberg resigned on 14 March, prompted by the New York attorney general's probe of the insurer's business practices.

AIG stock traded up 6 percent in less than an hour on the day, but fell back before the close to finish up 2 percent on the previous day at $53.30.

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