AIG admits reinsurance deal ‘improper’

US FINANCIAL services firm American International Group admits a reinsurance transaction with the Dublin-based subsidiary of General Re was improper.

In a statement yesterday, AIG said the $500 million deal with General Re, whose Dublin subsidiary is being probed by regulators in several countries, should not have been recorded in its books as premium income.

“Based on its review to date, AIG has concluded that the Gen Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance.”

Investigators from the US Securities & Exchange Commission and the Attorney General’s office in New York are looking at AIG as part of a wider crackdown on the industry.

Two of the deals under review are two $250 million transactions that AIG concluded with General Re in December 2000 and March 2001. AIG booked this as insurance premiums, which boosted its results.

AIG yesterday said some transactions “appear to have been structured for the sole or primary purpose of accomplishing a desired accounting effect”. It added that these deals should not have been recorded as insurance and will be adjusted to account for them as deposits rather than as premiums.

The regulatory investigation of AIG has claimed the scalp of its veteran chairman Hank Greenberg, who resigned on Tuesday and is threatening to damage the reputation of Warren Buffett, the head of Berkshire Hathaway, which owns General Re.

Mr Buffett, the world’s second-richest man, has denied any knowledge of the activities of General Re, with a spokesman saying the running of the company is left to local managers.

It has also emerged that American Michael Murphy, who is based in Bermuda, was sacked by AIG earlier this week for not co-operating with the investigations. He is reported to have been a director of an AIG subsidiary in Ireland called Starr Excess Liability Insurance International.

US regulators are looking at the General Re (and its subsidiary called Cologne Re) division called the “alternative solutions group”, which some reports claim is at the centre of the finite reinsurance transactions under scrutiny. This unit is based in the IFSC in Dublin.

The acknowledgement by AIG of an improper transaction with General Re will put further pressure on the company. It has emerged this week that two executives with General Re in Dublin are banned by the Australian regulator from working in the financial services industry.

The Australian agency barred six people last October from acting as senior executives in the country as part of the fallout from the collapse of the HIH group four years ago. The Australian authorities claim transactions between General Re and a HIH business unit called FAI added to the eventual collapse of HIH. A spokesperson for the Irish Financial Regulatory Authority said last night that it was aware of the various investigations and was co-operating with other regulators.

The two executives based in Dublin are unlikely to face similar action here as they are not at the employment level that would trigger action by IFSRA.

The Irish regulatory body is believed to have been aware of issues at General Re’s Dublin branch before the individuals were banned last October.