Spitzer Hints At AIG Settlement, Defends Insurance Industry Probes

April 05, 2005

NEW YORK (BestWire) - New York's state attorney general helped to ease the fears of American International Group Inc.'s shareholders with a short statement hinting that he believes a settlement can be reach regarding investigations into the insurer's business practices without resorting to a criminal indictment.

Attorney General Eliot Spitzer said his office's investigation into "financial transactions and the way these transactions were reported is proceeding," adding that AIG's board and current management are "now cooperating" with the probe.

"Based upon these efforts, and based upon our knowledge to date, we believe that a civil resolution with the corporation will ultimately be achievable," Spitzer said in the statement. The statement halted a downward slide in AIG's stock price since the resignation of Maurice R. Greenberg as chief executive officer on March 15. The stock had lost 19.8% of its value from that day until the morning of April 4. The release of Spitzer's three-sentence statement on the afternoon of April 4 gave the stock an immediate jolt, sending it up more than 6% in less than an hour. The stock lost steam late in the afternoon, finishing the day at $53.30 a share, up 2% from the previous close.

Ongoing investigations by Spitzer's office and the U.S. Securities and Exchange Commission into AIG business practices, particularly finite reinsurance transactions, have prodded AIG's board into quick action to shake up top management and cooperate with investigators. Greenberg, 79, who had been AIG's chairman and CEO for nearly 39 years, was forced out of both positions, and three other executives were fired for refusing to cooperate with investigators.

AIG also took the unprecedented move of making public preliminary findings of an internal investigation that showed improper accounting of a finite reinsurance transaction with Berkshire Hathaway Inc.'s General Reinsurance Corp., as well as improper accounting for dealings with reinsurance entities in Bermuda and Barbados in which AIG had significant stakes.

On the same day Spitzer released his statement, AIG's new CEO, Martin J. Sullivan, released a letter to shareholders in which he addressed recent media reports that someone had attempted an unauthorized removal of documents from an AIG office in Bermuda. In the letter, Sullivan assured shareholders that AIG had worked to preserve all documents relevant to the investigations and would turn them over to authorities (BestWire, April 4, 2005).

Spitzer, who has recently announced his candidacy for governor of New York, followed up with an April 5 column in the Wall Street Journal, in which he defended his investigations into insurance industry practices -- including probes into broker commissions -- against critics such as the U.S. Chamber of Commerce. Noting that the Chamber of Commerce has accused him of stepping "out of bounds," Spitzer wrote that bid-rigging and anticompetitive practices among insurers and brokers amounted to much more than "honest mistakes" and "differences of opinion," as the Chamber argued.

"This conduct has resulted in 10 insurance executives pleading guilty to criminal charges," Spitzer wrote of the investigations. "In addition, the nation's two largest insurance brokers admitted wrongdoing and agreed to settlements that implement sweeping reforms and provide resolutions totaling more than $1 billion, with all of this money going back to the businesses and individuals who are the victims of fraud."

Of the AIG investigation, Spitzer wrote, "the nation's largest insurance carrier has removed its renowned CEO and made a series of shocking admissions regarding actions that deliberately misled authorities and investors."

The A++ (Superior) financial strength of American International Group is under review with negative implications by A.M. Best Co.

(By David Pilla, senior associate editor, BestWeek)


Copyright 2005 A.M. Best Company, Inc.

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