HARTFORD, Conn.--Former Cologne Re Dublin Chief Executive Officer John Houldsworth understood from his first conversations with General Re Corp. officials about a proposed reinsurance deal with American International Group Inc. that the deal would include no risk transfer, Mr. Houldsworth told a federal jury Wednesday.
In a late evening phone call on Nov. 13, 2000, Elizabeth Monrad, Gen Re's former chief financial officer, told Mr. Houldsworth about former AIG CEO Maurice R. Greenberg's request that Gen Re--Cologne Re Dublin's parent company--cede up to $500 million in reserves to AIG, Mr. Houldsworth said.
Ms. Monrad told him that AIG wanted to appease stock analysts concerned about AIG's reserve levels and made it clear that as part of any reinsurance deal, Gen Re would not send a cash premium to AIG, would insist on avoiding adverse tax consequences for Cologne Re Dublin and "would not be charging (AIG) with any losses, if we had any," Mr. Houldsworth told jurors.
The testimony came in the third week of the trial of Ms. Monrad and four other Gen Re and AIG executives on charges that they engineered a fraudulent loss portfolio reinsurance deal that allowed AIG to inflate its loss reserves by $500 million in the last quarter of 2000 and the first quarter of 2001.
Those charged in addition to Ms. Monrad are Ronald E. Ferguson, Gen Re's former CEO; Christopher P. Garand, former senior vp in charge of U.S. finite underwriting for Gen Re; Robert Graham, former senior vp and legal counsel for the reinsurer; and Christian M. Milton, AIG's former vp for reinsurance.
Mr. Houldsworth's testimony follows that of Richard Napier, a former Gen Re senior vp who completed his testimony Tuesday. Both men have pleaded guilty to conspiracy in the case and are cooperating with the government.
Prosecutors played recordings of a series of phone calls Mr. Houldsworth had with some of the defendants and others at Gen Re in mid-November 2000.
In one Nov. 14, 2000, call, Ms. Monrad is heard telling Mr. Houldsworth not to worry about "whether we are transferring deposit liabilities or not."
"Any way we structure this, it's going to look like a deposit because they are not really looking to take risks," she adds later in the conversation, referring to AIG.
Gen Re ultimately accounted for the deal as a deposit, while AIG accounted for it as a risk-bearing reinsurance transaction, allowing it to report the reserves on its balance sheet.
Ms. Monrad also cautioned Mr. Houldsworth that the proposal was highly confidential: "If we ever talked about it, our name would be mud with AIG," she says on the recording.
Asked by Assistant U.S. Attorney Eric Glover why the concern with confidentiality, Mr. Houldsworth replied: "It obviously involved a U.S. public company looking to amend or misrepresent its financial statements."
Prosecutors also played recordings in which Mr. Houldsworth discussed the deal with Mr. Garand; Milan Vukelic, Mr. Houldsworth's boss at Cologne Re's Alternative Solutions unit in London; and Peter Gerhardt, Mr. Vukelic's superior at Cologne Re in Cologne, Germany.
Mr. Houldsworth also testified about the reinsurance slip he drafted for the deal, which showed AIG assuming up to $600 million in liabilities for $500 million in reserves. He included the $600 million limit "to give the appearance of risk transfer," Mr. Houldsworth said.
His testimony will continue Thursday.
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