A.I.G. Board Said to Weigh Chief's Future Amid InquiryBy Gretchen Morgenson
The New York Times
Published March 14, 2005
Maurice R. Greenberg, 79, the longtime chairman and chief executive of the American International Group, has been under strain from a number of federal and state investigations. In an effort to grapple with an accelerating investigation into American International Group and its chief executive, Maurice R. Greenberg, the company's board has in recent days been discussing the potential impact on A.I.G. and on Mr. Greenberg's future, according to a person briefed on the matter.
Although the details of the board's talks are not clear, it is likely that the directors were briefed on the role Mr. Greenberg played in a 2001 transaction that regulators say may have been designed to artificially bolster the company's financial position.
Mr. Greenberg, who will turn 80 on May 4, has run American International Group with an iron hand since 1967. Neither he nor the company has ever articulated a succession plan, a matter of concern to shareholders. Mr. Greenberg joined the company, which is based in New York, in 1960.
Officials from the Securities and Exchange Commission and the office of Eliot Spitzer, the New York attorney general, have been investigating whether American International Group used certain insurance deals to make its financial results look better than they actually were.
On Feb. 14, the company disclosed that it had received subpoenas from Mr. Spitzer and the S.E.C. relating to its nontraditional reinsurance transactions and how it had accounted for those transactions. American International Group said it was cooperating with the requests.
A spokesman at the company declined to comment.
Signs of turmoil inside the company have been evident in recent days. On Thursday evening, A.I.G. abruptly canceled a dinner with investors, sponsored by Goldman Sachs, minutes before it was to begin. The company also withdrew from a similar meeting sponsored by J. P. Morgan Chase that was scheduled to take place today.
After the cancellations, shares of A.I.G. fell 2 percent on Friday, to $64.71. Since the disclosure of the subpoenas, the stock has declined more than 11 percent.
Mr. Greenberg has hired a criminal defense lawyer, Robert G. Morvillo, who did not return phone calls seeking comment.
Regulators are questioning American International about a type of insurance, called reinsurance, that can be used to smooth earnings or bolster reserves, which are the funds insurers set aside to pay future claims.
The insurance is broadly known as finite insurance, or financial reinsurance, and subpoenas relating to its use have been issued recently to Ace Ltd., St. Paul Travelers and Zurich Reinsurance.
When used properly, finite insurance allows insurers or corporations to spread their risk of loss on an asset or business over time and also distribute risk among other insurers willing to take it on in exchange for premiums.
The potential problem in such a contract emerges when an auditor concludes that it is not really insurance - in which risk is transferred from one party to another - but a financing arrangement in which premiums paid by the company buying the coverage are seen as a deposit or a loan. In such a case, the beneficial accounting treatment given to insurance premiums disappears.
The specific transaction that investigators are focusing on at A.I.G., according to the person briefed on the matter, took place in the last quarter of 2000 and the first quarter of 2001. The transaction was struck between A.I.G. and Cologne Re, a foreign subsidiary of Gen Re, a company owned by Berkshire Hathaway. Berkshire Hathaway is run by Warren E. Buffett. Mr. Greenberg was personally involved in the transaction, according to the person briefed on the matter, which bolstered A.I.G.'s reserves by $500 million.
Investors monitor the levels of reserves held by an insurance company and do not like to see them fall. To avoid swings in reserves, insurers can enter into deals known as loss portfolio transfers, in which one company buys excess reserves from another. Reserves can also contribute to an insurance company's earnings. If an insurer has more reserves than it needs, for example, it takes those reserves into its earnings.
While the specifics of the transaction with Gen Re are not clear, a person briefed on the matter said that it appeared to fail the risk-transfer test that was necessary for a transaction to receive favorable insurance accounting.
If A.I.G. bought reserves from Gen Re to bolster its financial position artificially, securities regulators could argue that the transaction was designed to manipulate A.I.G. shares, running afoul of securities laws.
Calls to General Re seeking comment were not returned yesterday.
According to another person briefed on the investigation, A.I.G. officials have conducted their own analysis of the transaction with Gen Re and have presented their findings to securities regulators. The company may argue that a transfer of $500 million in reserves was immaterial given A.I.G.'s reserve base of $25 billion.
But since 1999, securities regulators have grown tougher on companies that claim that certain transactions are immaterial. If a transaction's purpose was to make a company's results or financial position look better, a regulatory official said, assertions of immateriality would probably be rejected.
On March 7, A.I.G. announced the appointment of Stephen L. Hammerman to its board. Mr. Hammerman is a former general counsel to Merrill Lynch as well as a former federal prosecutor. He was also New York regional administrator for the S.E.C.
In announcing the appointment, Mr. Greenberg said: "I am pleased that Steve Hammerman has joined the A.I.G. board. He brings a wealth of financial, legal and regulatory experience to our company."
A telephone call made to Mr. Hammerman's home yesterday was unanswered.
The board of A.I.G. has a regularly scheduled meeting on Wednesday.