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AIG finite deal at center of probe Greenberg said involved in loss portfolio transfer from Gen Re


NEW YORK-An investigation into the accounting treatment of a finite risk insurance transaction that Maurice R. Greenberg had direct involvement in may have been the last straw for the board of directors of American International Group Inc., which urged the longtime chief executive to step down last week.

New York Attorney General Eliot Spitzer and the Securities and Exchange Commission have been investigating a retrocessional loss portfolio transfer contract assumed by AIG from General Re Group that was orchestrated by Mr. Greenberg, sources close to the investigation say. Specifically, regulators want to know whether AIG correctly accounted for the transaction as reinsurance or whether the deal was more of a loan made to boost the insurer's reserves.

Although AIG has been grappling with several regulatory pressures recently, it is this latest deal that may have ultimately cost Mr. Greenberg his job.

"I think what happened the board of directors, particularly the outside members, got the idea that Spitzer and the SEC knew more about this particular transaction and Hank's direct personal connection to it than they knew themselves, and that made them really nervous," a source close to the matter said. "I think a lot of the pressure for Hank Greenberg to leave was coming from the outside directors who were trying to protect the integrity of the company."

Mr. Greenberg was set to be deposed as part of the investigations last Thursday, but officials are no longer interested in the deposition, a source close to the matter said.

Officials declined to comment on reports that they've obtained evidence about the deal from General Re's Dublin office, where the loss portfolio transfer originated.

General Re also has received requests from the SEC and Mr. Spitzer's office seeking documents and information relating to nontraditional or loss mitigation insurance products. The company said it is cooperating with both requests. The reinsurer did not return phone calls seeking comment on the AIG transaction.

AIG declined to comment on specifics of the investigation.

"Obviously, with regard to any regulatory issues, I would like to get these behind us as soon as possible and move forward," Martin J. Sullivan, AIG's new CEO, said last week on a conference call when asked about his priorities in the next six months.

A source close to the investigation said it is unclear what direction the investigation will take.

AIG last week placed Howard I. Smith, its chief financial officer, and Christian M. Milton, its vp-reinsurance, on administrative leave. The company would not comment on the reasons behind the moves.

The transaction in question was initiated in late 2000, when Mr. Greenberg contacted General Re's then-CEO Ronald E. Ferguson to discuss the possibility of AIG assuming a loss portfolio transfer from General Re, the source close to the investigation said.

Loss portfolio transfers are a retroactive finite risk product where a reinsurer assumes responsibility for all loss reserves for a line of coverage or book of business.

It is unknown what line or book of business AIG assumed from General Re, although it originated out of General Re's Dublin office, sources say.

AIG booked as income $500 million in premium for the loss portfolio transfer and then added $500 million in reserves against future claims to its balance sheet, sources say.

Investigators are trying to ascertain whether AIG correctly accounted for the transaction as reinsurance, given that the expected losses from the transfer equaled the premium, or whether AIG was simply trying to boost its reserves without negatively affecting its bottom line.

"It's that old 'Which side of the line are you standing on? Is it insurance or is it a loan?' Here it appears to be more of a loan," a source close to the investigation said.

In order for a finite risk contract to be accounted for as reinsurance, there must be risk transfer and there must be a reasonable possibility for the assumption of loss.

Finite risk experts say at first glance, the transaction does raise red flags.

"In my experience, it would be a pretty atypical transaction to do a (loss portfolio transfer) where the premium equaled the loss," said Norris Clark, a financial and regulatory specialist in the Los Angeles law firm of Lord, Bissell & Brook L.L.P. "I have not seen any of those in the past."

In typical retroactive finite deals, the assets or premiums transferred from the ceding company are less than the expected losses assumed by the reinsurer, Mr. Clark said. The reinsurer is then expected to make up for any premium shortfall with investment income.

When a reinsurer books premium income for the same amount it reserves, there is zero impact on net income, said Donald Light, a senior consultant with San Francisco-based Celent Communications. "It can be read as saying 'I have a problem: I don't want to change my net income, but I do want to strengthen reserves, how do I solve the problem?"' Mr. Light said.