AMERICAN INSURANCE GROUP INC.

• American International Group, Inc. (AIG) is a world leader in insurance and financial services.

• It is Headquartered in New York City, and operates in more than 130 countries and jurisdictions.

• Its Primary activities include General Insurance, Life Insurance and Retirement Services.

• In 2006, AIG had sales of $113 billion and 1,16,000 employees.

• Acc. to the 2008 Forbes global 2000 list, AIG was once the 18th largest public company in the
world

• AIG’s common stock is listed on the new York Stock Exchange, As well as exchanges in Ireland
and Tokyo.
In 1919, Cornelius Vander Starr
establishes American Asiatic
Underwriters (AAU), a general
insurance company, in Shanghai, Nelle Vander Starr (center) joins
China. the company’s early operations in
Shanghai, China, later becoming
the first woman executive.

The first U.S. office, American

International Underwriters
(AIU), opens in New York City.

First Latin American market

operation opens in Cuba.
Company headquarters
relocate from Shanghai, China
to New York City.
The acquisition of general insurer
Globe and Rutgers Insurance
Group, which includes the
American Home brand, expands
the company’s domestic market
presence.
Soon after World War II, C.V.
Starr opens offices, in Japan
and Germany to provide
insurance for the U.S. military.
Offices open in the United Kingdom.
The company provides aid to victims
of the devastating floods in the
Netherlands by making a $10,000
donation to support recovery
efforts.
AIG stock begins publicly
Muhammad Ali and George Foreman enter
trading the ring in Kinshasa, Zaire, for the Rumble in
the Jungle boxing event. AIG provides
transmission coverage as the match is
broadcast in approximately 100 countries
worldwide.

AIG begins trading on the New

York Stock Exchange
The People's Republic of China
grants AIG a license to operate a life
and non-life insurance business in
Shanghai, the first foreign insurer
granted a license in over 40 years by
the Chinese government.
An earthquake hits the Japanese
city of Kobe. An AIG crisis
management team responds
quickly, assessing damage
AIG acquires Sun America, Inc., a
leading retirement and financial
services company.
AIG launches microinsurance
operations, with the
Foundation for International
Community Assistance (FINCA).
AIG acquires American General
Corporation, a leading life insurer
Tata and AIG form a joint venture
general insurance company in India
Gen Re Corp OVERVIEW
• General reinsurance corporation is an American
multinational property/casualty and life/health
reinsurance company offering a range of reinsurance
products and services.
• Founded – 1846; 173 years ago
• Parent Organization – Berkshire Hathaway
• Current CEO – Kara Raiguel
• HQ – Stamford, US
• What is Reinsurance ?
• Reinsurance companies are entities that insure the
insurance companies. They help insurance companies
share risk by selling reinsurance plans that would help
pay off a share of a claim from the insurance
companies.
Personnel Entangled on Scam Tenure
Hank Greenberg
American Insurance Group, CEO
▪ Born 1926
▪ Admitted to NY Bar in 1953
▪ Joined AIG in 1962
▪ Named CEO in 1968
▪ LED AIG for 38 years
▪ Stepped down March 21, 2005
Ron Ferguson
Gen Re Corporation, CEO
▪ Born 1942
▪ Fellow of CAS
▪ Co-developer of B-F Method
▪ Joined Gen Re in 1966
▪ Named CEO in 1987
▪ 1998 Berkshire Hathaway acquired
Gen Re
▪ Retired on 2002
Eliot Spitzer
Attorney General
▪ Born 1959
▪ Former Attorney General of NY
▪ Notable Prosecutions:-
1. Mutual Fund Scandals (2003)
2. Insurer bid Rigging (2004)
3. AIG accounting scandal;
▪ Elected governor of NY in 2006
8
Other Personnel Entangled in Scam

Christopher Elizabeth Robert

Garnard Monrad Garham, JD
Senior VP and Chief CFO of GenRe 2000 SVP and Asst. General
Under writer of to 2003 Counsel at GenRe
GenRe until 2005

Christian Richard John

Milton Napier Houldsworth
VP of AIG”s SVP Responsible for CEO of Cologne Re
Reinsurance until GenRe relationship Dublin
2005 with AIG (CRD)

9
• AIG is caught in scandal for fraudulent
accounting with the help of General
Reinsurance Corporation. In October
2000, AIG announced a decrease in their
loss revenues by $59 millions, which was
followed by a drop of 6% of their stock in
AIG Account
NYSE.
Scandal
• According to investigations, AIG reserves Brief
were too low. This resulted in criticism
from Wall Street analysis in view of the
fact that loss reserves is a crucial measure
of an insurance company’s financial
health

10
• To quell the criticism, the top executives of AIG sought help from General Reinsurance
Corporation who structured two sham transactions to help boost AIG’s Loss reserves.

• GenRe agreed to pay $500 million premium and shift $500 of claims with little or no risk to
AIG,
$250 each in 2000 and 2001.

• Since there is no actual risk transferred, the transaction is not an insurance deal according
to Insurance Accounting 101.

• I.E., $500 millions should not be categorised as income on its income statement . However,
AIG accounted for the transaction as a normal deal and recorded $500 million in their
premium revenue which made up to the loss reserves to pay claims.

11
• As a result the Balance sheet showed a
false increase in loss reserves while the
income statement showed a wrong
increase in income for the fourth quarter in
2000 and first 2001.

• AIG lied to investors and government by

cooking their books which is not for the
first time. AIG was already other illegal
wrong doings like assisting clients in
manipulating their statements and bid-
rigging
• That’s why Securities and Exchange
Commission And New York Eliot Spitzer
started to get suspicious and investigated
AIG’s deal with General Reinsurance that
was made for four years.

12
During Financial Crisis of 2008, people were
losing a lot of money and employment rate
increased drastically. Sensing such non-
availability of funds , banks decided not to give
loans to individuals or business firms. As a
result, business were highly affected.

However AIG found an opportunity to Global Financial

maximise its profits by finding in a loophole in
BaseI II regulation. The Basel II regulation Crisis 2008
determines how much amount the banks are
supposed to keep with themselves. They used Credit Default Swap
somewhat called CREDIT DEFAULT SWAP.

CREDIT DEFAULT SWAP(CDS)

• A CDS is an over-the –counter derivative

• As a derivative financial product, it derives its value from
something else – for CDS bonds
• People use CDS to manage risk. 13
• In simple words, the seller of the Swap (AIG) will pay
the buyer (Banks) in the event of loan default. So
CREDIT
banks gave out money which was supposed to be
kept as reserve. AIG gave banks a way to maximise
DEFAULT SWAP
their profits. How Convicted ?
• Market to market accounting, AIG was allowed to
book the profit from CDS based on expected profits.
There was no profits they were making. They were
writing those profits which they expected to make
and they would write it down in their books and act
as it it was real profit. !
• As soon as the market crashed, it had to pay of all
the CDS and they didn’t have money to pay off
swaps.

• Federal Government stepped in and loaned AIG $200

billion and why they did it because “AIG IS TOO BIG
TO FAIL”
How AIG Came Under Scrutiny

2001 - SEC
2003 – SEC
learns that March 30,
and Justice
AIG has 2004 – 2005 – AIG
Department May
assisted a Federal discloses
Settle with 31,2005
client Grand Jury 2004 – Big that
AIG Feb 9, 2005 Restatemen
company in begins rigging reinsurance
investigatio a. $10 – 2004 t amounted
bolstering investigatio complaint deal with
n ensues Million Civil earning to reduction
its balance n of AIG’s against AIG GenRe have
Penalty released in 2004 net
sheet income and others been
b. income of $
through a smoothing accounted
Independen 1.32 Billion
bogus products. for as
t Consultant
insurance deposit
Retained
transaction.
 THE PROSECUTION CASE
❑ On 26, 2000 – AIG announced that premiums increased in Q3, but reserves fell by $59 million

❑ Oct 26, 2000 – AIG share price dropped from $99.37 to $93.31 on NYSE (6%)

❑ October 31, 2000 – Greenberg called Ferguson

❑ Greenberg asked Ferguson to temporarily transfer loss reserves to AIG

- Amount of $200 to $500 million
- To occur by year end 2000
- To last 6 to 9 months
- AIG should incur no losses (i.e., the deal should be riskless )
 INITIAL STEPS

Parties Agree to deal :

- GenRe to transfer loss
reserves to AIG in
exchange for a payment
of premium

Two separate contracts

transfer loss reserves:
Contract to last - $250 million in 2000 with
24 months cap of $300 million
- $251 million in 2001 with
cap of $300 million

GenRe “obligated” to
GenRe to receive
pay AIG “premium”
$5 million for
of $500 million ($250
doing the deal
million per contract)
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 OTHER ISSUES WITH THE DEAL
▪ Accounting Problem
- Deposit or Reinsurance accounting ?
- AIG used reinsurance accounting
- Gen Re used deposit accounting

▪ The “North American Problem” –

- Statutory reporting requires disclosure of premium and reserves related to each reinsurance
transactions
- Gen Re’s foreign subsidiary ( CRD) not required to file US reports

▪ A paper trail had to be created to appear that Gen Re proposed the deal

▪ Gen Re had to appear to be on the hook for $500 million in premium without actually paying it.

▪ AIG had to pay Gen Re’s $5 million fee for doing the deal without attracting the attention of regulators
 The Loss PortfolioTransfer

AIG Corp. • Impact of AIG loss Reserves

Financial LPT
Reported Actual
National Union Quarters Contracts
Assets
+$10 Million Premiums paid by card
+$490M Premium Recivable withheld 4Q 2000 +$160 M -$250 M -$144 M
by CRD

Liabilities
+500M Additional Reserves
1Q 2001 +$63 M -$250 M -$187 M
 How CRD paid $10M in premium without really paying

• Leverage existing contract, in which Gen Re holds $31.8 M payable to AIG

• Gen Re pays only $7.5M to commute an existing contract with AIG’s Hartford Steam Boiler
(HSB)
• Gen Re pays National Union $9.1M in premium to reinsure the HSB losses that were just
commuted
• CRD pays $0.4M in premiums to Gen Re for a “Sham” reinsurance contract and receives a
loss payment of $13M shortly after ink dries.
• CRD pays LPT “Premium” of $10M to AIG
• Gen Re/ CRD left with $5.2M to cover the fee.

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THE “RoundTrip Of Cash”
 AUDITING FAILED
o The audit company that works for AIG through the
years of all its accounting misdoing is PRICE
WATERHOUSE COOPERS LLP.

o PWC signed of the financial statements of AIG

o AIG shareholders complainted PwC to have

violated the securities laws in providing AIG
auditing services.

o On 2 Dec, 2010 - PwC had to provide 97.5 million

in settlement for the AIG shareholders.
• Pwc has a long business relationship with AIG for
over 30 years.

• The former CFO of AIG, Howard I. Smith was

working Coopers for 19 years before he came to
AIG. Considering that AIG is one of the biggest
clients of pwc and has paid about $140 million
service between 2001 and 2003.

• PwC ignored the „red flags‟ regarding AIG‟s

poor accounting practices.

• If pwc was on high alert, it might have worked

closely with AIG and prohibited AIG from
classifying the $ 500 million as revenue.
23

Cases and Judgement
Ron Ferguson
Gen Re, CEO
Convicted of
• Conspiracy (1 count)
• Securities fraud (7 counts)
• False statement to SEC (5
counts)
• Mail fraud (3 Counts)
Judgement
• 2 years in prison
• $2,00,000 fine
FATE OF THE PARTICIPANTS.
Hank Greenberg Eliot Spitzer
AIG, CEO Attorney General, NY
• Denied Allegations • Stepped down as governor in
2008
• Took 5th
• Amid allegations of patronizing
• Step down on 2005 from CEO
a prostitution ring.
• Trial taken place and Judgement
awaited
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Cases and Judgement
Christopher Garnard
Gen Re, Senior Vice Preside
Convicted of
• Conspiracy (1 count)
• Securities fraud (7 counts)
• False statement to SEC (5
counts)
• Mail fraud (3 Counts)
Judgement
• 4 years in prison
• $2,00,000 fine
FATE OF THE PARTICIPANTS.
Christian Milton Elzabeth Mornard
AIG,Vice President
Gen Re, CFO
Convicted of
Convicted of
• Conspiracy (1 count)
• Conspiracy (1 count)
• Securities fraud (7 counts)
• Securities fraud (7 counts)
• False statement to SEC (5
counts) • False statement to SEC (5
counts)
• Mail fraud (3 Counts)
• Mail fraud (3 Counts)
Judgement
Judgement
• 4 years in prison
• Pending 25
• $2,00,000 fine
The Impact of scandal

Employees Company Public Government Margins

Employees were The company The People had AIG being one of Companies
told to buy the Fired Its CEO to lose a lot the leading Profit margin
shares to help and CFO. They because all their insurance narrowed and
sustain the even lost the insurance was at Company in the struggles to
company’s interest of lot of risk during world. The maintain in
losses investors and the scandal scandal created market even
Shares. Great negative now.
impact in the 26
govt.
AIG’s REVIVAL
AIG – YEAR vs TOTAL ASSETS
• The United States Department of the Treasury
announced an offering of 188.5 million shares of AIG
for a total of $5.8 billion on May 7, 2012

• On September 6, 2012, AIG sold $2 billion of its

investment in AIA to repay government loans

• On October 12, 2012, AIG announced a five and a

half year agreement to sponsor six New Zealand-
based rugby teams, -including Team ALL BLACKS.

• To Repay Federal Reserve Bank of New York, AIG

sold off a number of its own assets to raise money
to pay back the government.

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AIG’s REVIVAL
AIG – YEAR vs MARKET CAPITALISATION
• AIG began an advertising campaign on January 1,
2013, called "Thank You America," in which several
company employees, including AIG President and
CEO Robert Benmosche, talked directly to the
camera and offered their thanks for the government
assistance.

• Brian Duperreault was appointed CEO of AIG on May

15, 2017.

• Company reorganized into three segments,

comprising a general insurance unit, a life and
retirement unit, and a stand-alone technology-
focused 28
• The official securities should more
research about the company and try
to solve the problem right away.

• The government should track these

transactions between companies
because in this scandal it shows that
the government didn’t know about
FROM FAILURE
the violations until the company TO SUCCESS
themselves exposed.
CONCLUSION
• The government should always keep a
close track of the companies accounts
to check if there’s any fraud activity.

• Moreover the people or investors

should take initiative to keep a close
attention towards any company’s net
income before investing.
QUERIES ?

THANK YOU

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