AIG's German Cousin
Updated from March 30
American International Group's
(AIG) - Get Report
startling disclosure Wednesday that it controls several companies with which it did bogus reinsurance transactions shines an unflattering light on another industry titan with offshore interests:
Munich Re
.
Although Munich Re was the single largest equity owner of one of the AIG firms, Richmond Insurance, AIG disclosed Wednesday that it effectively controls Richmond. The tiny reinsurer appears to have served as a dumping ground for AIG's poor performing insurance policies over the years.
Even AIG was forced to admit as much Wednesday, when it disclosed the partial results of an internal investigation into allegations of accounting irregularities at the nation's largest insurer.
AIG said the lawyers conducting the inquiry found that Richmond should be treated as a "consolidated entity'' on AIG's books, even though AIG owns just 19.9% of the Bermuda-based reinsurer. The lawyers rendered their verdict after reviewing "significant previously undisclosed evidence of AIG's control.''
TheStreet.com
reported last week that Munich Re reports a 49% equity stake in Richmond in its corporate filings.
In effect, the lawyers concluded that AIG had been doing deals with itself when it sold some of the risk of a future loss on an underlying insurance policy to Richmond. The numerous reinsurance deals with Richmond enabled AIG over the year to free up capital so it could underwrite more policies and reduce the reserves it needed to cover potential claims.
But since Richmond was an alter ego of AIG, those policies were never really transferred off AIG's books. By doing deals with Richmond, AIG only made it seem that it had been engaging in arm's-length transactions with an ostensibly independent reinsurer.
The findings of AIG's internal inquiry would appear to confirm the worst suspicions of state and federal investigators, who believe many of AIG's former and current top executives resorted to Enron-like subterfuge to manipulate the company's earnings.
So it begs the question: Why would Munich Re, the world's largest reinsurer, be involved in such a venture in the first place?
After all, despite AIG's talk about "significant previously undisclosed evidence," AIG's virtual control over Richmond was not a well-kept secret in the Bermuda insurance market.
As reported by
TheStreet.com
, the Bermuda insurance registry lists AIG as Richmond's "management company." The only published telephone number for Richmond is the general number for AIG's main Bermuda offices. All three of Richmond's top executives also are high-ranking AIG executives in Bermuda.
Additionally, a 2004 report prepared by the Bermuda Insurance Institute lists AIG as the "sponsor company" of Richmond, which is set up as a so-called "rent-a-captive" reinsurer. Rent-a-captives are usually set up by an insurer or a group of insurers as a way to provide additional coverage to their customers. In effect, a company buying coverage from a rent-a-captive acts as its own insurer by getting to "rent" the capital of the insurers standing behind the enterprise.
Surely all of this was no secret to Munich Re, which has had a 49% equity stake in Richmond for more than a decade.
A Munich Re spokeswoman, in an email response, says the reinsurer "never, as a matter of principle, comments on its clients.'' The spokeswoman says the German-based company "has not been contacted by the authorities in specific connection with AIG or Richmond.''
At the end of last year, she says, Munich Re did receive subpoenas from the Securities and Exchange Commission and New York Attorney General Eliot Spitzer seeking information about the sale of "nontraditional" insurance products.
Nontraditional products most likely refers to so-called finite insurance policies, a controversial type of income-smoothing insurance product that has drawn scrutiny in the investigation of AIG and other insurers.
In 2004, Munich Re's US subsidiary, American ReInsurance, decided to "de-emphasize finite risk business for strategic business purposes," the Munich Re spokeswoman says.
Chris Winans, an AIG spokesman, declined to comment on Richmond or Munich Re.
But a person close to the investigation said Munich Re's involvement in Richmond is something that might require further scrutiny.
Several former AIG employees -- all of whom were interviewed on condition of anonymity -- believe Munich Re got involved in Richmond as a favor to their longtime customer. Historically, they say, AIG has had a longstanding business relationship with the German-based reinsurer.
One employee suggested that Munich Re's investment in Richmond might be nothing more than an "accommodation" to an important industry player. From Munich Re's perspective, the investment in Richmond was relatively insignificant.
For AIG, however, Richmond was no insignificant matter. These former employees say that over the years, Richmond was used as place for the insurer to dump poor-performing policies.
In fact, one former employee, who worked in AIG's risk management division, says reinsurance policies could not be purchased from Richmond without approval of AIG's senior management.
Of course, Richmond may be just the tip of the iceberg when it comes to AIG's use of small offshore reinsurers.
AIG's lawyers are close to deciding that the insurer also secretly controlled
Union Excess Reinsurance
, another offshore reinsurer that entered into dozens of transactions with AIG. The insurers lawyers have found that Union Excess, which operates out of the offices of the Barbados-based law firm Chancery Chambers, is partially owned by
Starr International
, AIG's largest shareholder, owning about $19 billion of AIG stock.
Created decades ago by AIG, Starr provides deferred compensation to the insurer's executive-level employees and is controlled by Maurice Greenberg, who up until this week had ruled AIG with an iron fist for nearly four decades. Greenberg was forced to step down as CEO and chairman of AIG because of the accounting scandal.
If Union Excess is brought back on to AIG's balance sheet, it would reduce shareholder equity in AIG by $1.1 billion.