No Shortage of Clues on the AIG Trail

For more than a decade, American International Group(AIG Quote) feigned ignorance when it came to Richmond Insurance, the Bermuda-based reinsurer that served as a trusty dumping ground for the big firm's unwanted policies.

Citing its minority 19% equity interest in Richmond, AIG and its auditors at PriceWaterhouseCoopers treated Richmond as an independent business that needn't be included in AIG's financial statements.

But last week, in disclosing a series of troublesome accounting errors, AIG finally 'fessed up, saying it did indeed control Richmond.

Without offering any details, AIG said it only recently discovered "previously undisclosed evidence" of its control of Richmond. In light of the belated discovery, AIG will begin treating Richmond as a subsidiary, something it may be forced to do with at least two other little-known offshore reinsurers.

However, the signs of AIG's apparent, if not actual, control over Richmond were pretty much in plain view long before the insurer became engulfed in the current accounting scandal. The trouble is, neither the company's accountants nor the Wall Street analysts who cover AIG were paying attention.

It's been widely reported on TheStreet.com and in other publications that Bermuda insurance officials listed AIG as the management company and "sponsor" of Richmond. The six-person reinsurer also operates out of AIG's Bermuda's headquarters, and three of its top managers are senior AIG executives.

But there's much more to this story of missed warning signs.

In 1996, Richmond established a subsidiary in Gibraltar called Euroguard Insurance, a so-called rent-a-captive insurer, which boasts on its Web site about its many ties to AIG. In describing Euroguard, the Web site says the insurer is owned by Richmond, "which is owned primarily by insurers and reinsurers, including a member company of American International Group."

No other owners of Richmond are mentioned, not even Munich Re, the giant German reinsurer that has a 49% equity stake in Richmond.