In the limelight - Snide casts his caustic eye over the market...(March 2004)
AIG's glow dulled by criticism
February was a memorable month for AIG and its legendary patriarch Hank Greenberg but not all for the right reasons. It started off well, as the Group revealed a "record" 68 percent leap in earnings. But subsequent events - including a verbal brawl with the powerful US legal lobby - conspired to dull the applause.
A comparison of the US plaintiff bar as "terrorists" at a 24 February Boston chief executives' dinner sparked an eruption of moral outrage from US attorney groups. "Shame on Mr Greenberg and shame on AIG," huffed John Eddie Williams, the president of the Texas Trial Lawyers Association; "Any similarity between lawyers - any lawyers - and terrorists demonstrated an appalling lack of appreciation for the role of law and lawyers in our society," sniffed ABA president Dennis Archer.
Another legal body, the Association of Trial Lawyers of America, reminded Greenberg that its members were helping America in its fight on "war on terror" and demanded an apology.
"People did not die on September 11 so we could have a new buzzword to throw at a person or group of people with whom you disagree. Thousands of American men and women are putting their life on the line for their country at this very second. Respect that and take it seriously," warned Williams.
Greenberg, of course, is experienced enough to cope with this bout of indignation - which, regardless, will blow away soon. However, the row took attention away from his central message - the iniquities of the US tort system. For such a careful, considered individual he will be angry that he gave the plaintiff bar - the major obstacle to meaningful reform at both a State and Federal level - an opportunity to move the debate onto an emotional platform with which, in the US, many will sympathise.
Perhaps more damaging was some masterful analysis by David Schiff, the editor of the US based Schiff's Insurance Observer, who noted anomalies in AIG's earnings in a 26 February article, "AIG: The Art of Manipulation?".
Schiff pulled no punches from the beginning: "On Wednesday, February 11, American International Group, whose advertising slogan is 'We Know Money,' issued a press release containing its fourth-quarter and full-year earnings and related financial information. It was a swell press release - except for the fact that it was misleading, deceptive and inconsistent with the way AIG had highlighted its earnings in previous press releases." Ouch.
At the heart of Schiff's analysis is the fact that AIG has altered the way it presents its earnings 20 times since the fourth quarter of 1999 (16 earnings releases and four annual reports). Of these, the alteration has presented AIG's figures in a more favourable light 19 times. For instance, in the first quarter of 2000 AIG began excluding realised capital gains or losses. But in the previous eight years, AIG had done remarkably well with investments recording 30 capital gains and only two small (to the point of being neglible) losses. Since the shift, however, AIG only had realised capital losses. A coincidence, asks Schiff?
Another example links back to Greenberg's recent slanging match with the legal industry. In the fourth quarter of 2002, AIG took a post-tax $1.8bn loss-reserve charge for US casualty losses. "No actuarial calculation could have predicted the explosion of litigation in the United States," explained Greenberg who described the charge as an "extraordinary reserve adjustment". As a consequence, AIG reported "core earnings" - (a method relied upon after 11 September to strip out the impact of the WTC losses) which also excluded the loss reserve charge.
But, points out the observant Schiff, although the auditors may not have picked up on Greenberg's so-called "explosion of litigation", Greenberg himself did. Indeed, he has been warning about the "liability bubble" for over 20 years. In 1986, for instance, Greenberg warned: "The courts in our country continue to broaden the standards of legal responsibility and increase the size of awards."
Talbot finds the Holy Grail
Contingency is not the easiest class to write and certainly London has seen a capacity withdrawal in recent years following a spate of heavy losses, such as the liquidated damages Murrin Murrin claim in Australia, the cancelled Cheltenham Festival of 2002 (Foot and Mouth) together with a host of sporting and entertainment events such as the Ryder Cup following the 11 September attacks.
But it would appear that Lloyd's insurer Talbot Underwriting has found the Holy Grail of insurance - the no-lose risk. In its 26 February press release trumpeting the capture of two former GoshawK underwriters Danny Burns and Susan House and their contingency book, Talbot revealed that their new recruits "previously underwrote this class at GoshawK and they guaranteed a profitable account" (Snide emphasis).
As Private Eye would remark: Shurely shome mistake!