Although finite reinsurance got the most attention Thursday when New York officials filed their civil suit against American International Group Inc., the officials also are accusing AIG of violating accounting rules at its life settlements business.[@@]
The complaint, filed in a state court in New York, alleges that former AIG Chairman Maurice Greenberg falsely reported income from life settlement investments as underwriting income.
Life settlement companies buy life insurance policies at a discount to face value from policyholders with short life expectancies. The settlement companies profit by collecting the death benefits when policyholders die.
Greenberg masked his company’s involvement in the life settlement business by establishing a trust, the Coventry Life Settlement Trust, that would be majority-owned by an outside company, according to the complaint, which was filed by New York Attorney General Eliot Spitzer and New York Insurance Superintendent Howard Mills.
“Coventry would act as owner and administrator of a trust that would permit AIG to book its life settlement activities as underwriting volume, thereby enhancing AIG’s underlying insurance underwriting results,” officials allege in the complaint.
Officials say an AIG affiliate, American Home Assurance Corp., lent the Coventry trust the funds needed to buy life settlement policies and pay the premiums on the purchased policies.
Instead of using that money directly to buy life settlements, the Coventry trust would use the borrowed funds to pay a “premium” to an Alaskan insurance subsidiary of AIG, the American International Specialty Lines Insurance Company, in exchange for a fake surety insurance policy that would guarantee the Coventry trust’s obligations to third parties, the officials allege.
The Coventry trust would then file a “claim”, officials allege, with AISLIC for the same amount it had just paid to AISLIC as a premium. AISLIC would pay the amount back to the Coventry trust, which then would use the same funds to buy the life settlements and pay its other expenses. When the death benefits were ultimately paid under the life settlements, the Coventry trust would pay the benefits to AISLIC as further “premiums” on the insurance policy, and AISLIC would be able to report the life settlement income as underwriting income on its surety policy, officials allege.
The initial premium production on $10 million in 2001 grew to $927 million 2 years later and generated an underwriting profit of $76 million under the Generally Accepted Accounting Principles.
In 2004, the Alaska Insurance Department asked questions about the accounting, and AIG moved the business offshore, officials allege.
“AIG continues to account for this investment as if it were insurance,” officials allege in the New York complaint.
In April, Greenberg invoked his Fifth Amendment rights to avoid self-incrimination when he was asked about the Coventry trust matter.
Representatives for a well-known life settlement company that includes the word “Coventry” in its name, Coventry First L.L.C., Fort Washington, Pa., were not immediately available to comment on their company’s relationship with AIG.
The Insurance Services Division of the AIG Advisor Group says a Web site copyrighted by AIG that the division has a “network-wide agreement” to refer financial advisors with questions about life settlements to Coventry First.
New York officials describe the Coventry trust arrangement, including a partnership agreement allegedly signed in September 2001, on pages 24 through 27 of the complaint, which is on the Web at http://www.oag.state.ny.us/press/2005/may/Summons%20and%20Complaint.pdf
Officials have included copies of documents referring directly to the arrangement on pages 3 through 10 in an exhibit file posted on the Web at http://www.oag.state.ny.us/press/2005/may/Exhibits%203.pdf and on page 4 of an exhibit posted at http://www.oag.state.ny.us/press/2005/may/Exhibits%204.pdf
Additional information was provided by Allison Bell.